Synthetic Governance

Synthetic Governance

Byung Hyun Ahn, Jill Fisch, Panos N. Patatoukas, Steven Davidoff Solomon

Series number :

Serial Number: 

Date posted :

August 20 2020

Last revised :

August 20 2020
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  • law and economics • 
  • Corporate governance • 
  • capital markets • 
  • securities regulation • 
  • mutual funds • 
  • dual-class stock • 
  • Shareholder voting • 
  • Investment Choices • 
  • asset management • 
  • index funds • 
  • split board chair and CEO

Scholars, practitioners and policymakers continue to debate what constitutes “good” corporate governance.

Academic efforts to evaluate the effect of governance provisions such as dual class voting structures, staggered boards of directors and separating the  positions of CEO and Chairman of the Board, have produced inconsistent or inconclusive results. The consequence is that the debate  over corporate governance is increasingly political and discordant.

We offer a way to address this debate. The rise of index-based investing provides a market-based alternative to governance regulation. Through the creation of bespoke governance index funds, asset managers can offer investors the opportunity to choose an index that corresponds to their governance preferences. We term this approach synthetic governance. At the same time, synthetic governance offers a new tool to collect evidence on the economic impact of corporate governance by providing a market-based tool for evaluating  the relationship between corporate governance and stock returns.

We illustrate the potential of synthetic governance with the creation of a new governance-based index, the Dual Index, which selects portfolio companies on the basis of a dual class voting structure. We compare the performance of the Dual Index to various benchmarks and demonstrate the potential, through governance-based indexing, for investors to realize superior returns. We further modify the Dual Index by implementing synthetic sunsets to highlight the value creation of dual-class companies in their early years and provide evidence on the appropriate length of a time-based sunset provision. Finally, we expand our analysis of synthetic governance with a second index – the Split Index – which tests  the  effect  of separating  the positions  of CEO and  Chairman of the  Board. We conclude that synthetic governance offers a meaningful way for investors and issuers to more economically adopt and invest in governance provisions. We thus provide a way out of the corporate current war over what exactly constitutes “good” governance.


Real name:
Research Member, Board Member
University of Pennsylvania Law School
Real name:
Byung Hyun Ahn
Real name:
Panos N. Patatoukas